Does your business model include a “protection plan” for customers that pays them for damages caused by your services?  This can be an attractive component of your business and a way to reassure your customers. The protection is typically an easy value add-on in the apps that customers access via the internet or mobile devices. But because your business is agreeing to indemnify against loss arising from a contingent or unknown future event, does that subject it to restrictions on selling insurance?

The regulation of insurance is done on a state-by-state basis, and different states have different definitions of when a business must obtain a license to sell “insurance.”

In the context of storage businesses, the Supreme Court of California is currently reviewing whether a “customer goods protection plan” offered by a storage company to customers who want extra value protection for their personal property is subject to state licensing requirements. See Heckart v. A-1 Self Storage, Case No. S232322.

In Heckart, the California Court of Appeal (Fourth District) applied what is called the “principal object and purpose” test and held that the damage protection plan was not insurance. This is consistent with other cases in other business contexts.  For example, in Wayne v. DHL, 2008 WL 2503245 (Cal. Ct. of Appeal, 2nd Dist., June 24, 2008) (unpublished), the court addressed whether DHL was improperly selling insurance when it offered customers so-called “shipment value protection” for packages being delivered by DHL.  For a small fee, DHL would agree to pay a higher value to the customer if the property being delivered was damaged.  Otherwise, DHL’s liability was limited.

The court said this was not insurance for the following reasons:

  • The protection plan was an option that the customer could voluntarily choose to purchase or not.
  • The principal object and purpose of the transaction was transportation, not insurance.
  • DHL was the sole insured on a policy of inland marine insurance—DHL’s customers were not additional insureds under that policy.
  • The insurer paid DHL—not the shipping customer—in the event of a loss.

Oral argument in Heckart is expected later this summer and the Court’s decision will shed additional light on whether the “principal object and purpose” test applies broadly in California. If your business operates in other jurisdictions, a review of other state regulations might be advisable.